by Tim Murphy, Analyst

The PV market in Europe has been stimulated largely due to government-mandated incentives, related either to PV electricity production or to the first cost of the PV investment. While government incentives have largely been in the form of feed-in-tariff (FIT) type schemes and/or net metering benefits, the latter was often a grant award or a tax deduction allowance.

However, in 2012, PV policies are changing across Europe to reduce incentive levels - in some cases, retroactively. The financial crisis in Europe is causing governments to implement austerity measures, and support for public and/or ratepayer funding of PV incentives is falling.

So, what will now emerge to drive PV market demand within Europe? The changing incentives landscape within the Netherlands and Belgium may be a leading indicator for more widespread changes across Europe. While PV grant awards are largely becoming a thing of the past in Europe, the Netherlands has recently enacted a new incentive policy of this type (several PV companies have criticized this measure as being somewhat ‘retrograde’).

Both the Netherlands and Belgium offer a type of net metering production incentive allowance. In each country, the policy is coming under pressure to be modified. PV operators are concerned that modification could reduce their benefit. The net metering benefit can be viewed as avoiding the purchase of electricity, which does not generate revenue for the operator, but does enable them to spend less on annual electric bills. The benefit does not come from public funds or ratepayers, in contrast to FIT or grant type funding.

In both the Netherlands and Belgium, the residential net metering allowance is of an ‘annual balance’ nature. Effectively, the electricity meter is allowed to run backwards during sunshine hours, but needs to balance out over the year. Some areas use time-of-day metering which is more complex and can affect the balance. The current review of regulations is based upon charging grid-access fees and implementing smart meters that would allow greater precision in assigning time-of-day (or other variables) to this ‘balancing’ operation.

From August 2012, the Green Certificate rate (GC; effectively a FIT ‘type’) was reduced by 57% within the Flanders region of Belgium, and the payment term halved to 10 years. Also, modification of the national net metering terms has been requested by adding a grid access charge. The investment return of installations by market segment is shown in the graph, based upon (pre-tax) ‘first cost of installations’ and (estimated) PV electricity production.

Internal rate of return (IRR) for different PV system types within the Flanders region of Belgium (BM - building mount)

Even with these drastic cuts, the residential segment remains economically attractive. (This is true if the full net metering allowance is not reduced over a 20-year project life, even though GC remuneration ends in year-10.) However, the commercial applications fall into a ‘sub-economic’ investment criteria, a situation that has existed since Q3’11 when the >250 kW type began declining to the €0.09/kWh GC rate to be applied to all types as of August 1.

In addition to the forecasted decline in installed PV system prices, residential type viability is also increasing due to avoiding electricity purchase (currently around €0.23/kWh) during 20 years, as that retail rate is increasing at 3% per year. The commercial applications avoid electricity purchase at a lower rate. Also, the regulations do not allow full net metering as in the case of residential types.

In the Netherlands, there is now an increased volume of PV market demand that is falling outside of the incentives schemes, by taking advantage of the annual balance net metering allowance. In practice, the economic benefit is avoided electricity purchase at a relatively high rate. There are other emerging local incentives that also improve the economic benefits.

In Belgium, the market will decline significantly during 2H’12 after the drastic cuts planned from 1 August 2012 in Flanders, in addition to the abolishment of national tax deduction incentives in Q4’11. However, as long as the net metering allowance is not reduced at the same rate, the residential market segment could rebound if residential PV investors accept lower (though still attractive) IRRs.